Has inflation really eroded Americans’ wage gains in the pandemic? Some regional Federal Reserve economists say no.
Even though decades-high inflation has eaten into earnings in recent months, the net effect over the past two years is still positive, according to a blog post from the Dallas Fed Tuesday. Researchers found wages rose during the period when adjusting for changes in the makeup of the labor force.
“Despite recent negative real wage growth, workers have experienced real wage gains over the two years of the pandemic,” researchers Sean Howard, Robert Rich and Joseph Tracy said in the post.
The findings follow a recent disagreement on Twitter between Nobel laureate economist Paul Krugman and Jason Furman, a Harvard Kennedy School professor and former economic adviser to President Barack Obama. Krugman said in December real wages had risen since the pre-pandemic period, but Furman said they’d declined about 1%.
The reality is a bit more complicated, according to the Fed economists. Researchers used average hourly earnings from the Bureau of Labor Statistics’ monthly jobs report, which jumped 5.7% in January from a year ago.
They also took into account the consumer price index, a key measure of inflation which registered a fresh four-decade high in January. Wages adjusted for inflation dropped 1.7% last month on an annual basis, the BLS said last week.
The research controlled for composition effects to reflect how the workforce changed amid the pandemic jobs churn. This is important because if a slew of higher-paid workers left the labor force while lower-wage ones entered, it has a negative effect on compensation.
When accounting for those shifts and holding them constant to historical trends, real wages declined 0.1% in the fourth quarter of 2021 as inflation skyrocketed. Wage growth was closer to 2% in the first three months of 2019 when the CPI was about five times lower than it is now, the findings showed.
